Friday, December 11, 2009

My financial reform contrasted to those of Ellen Brown

Ellen Brown has been proposing that in view of the fact that credit can be freely created, why don't states get into the act as a means of financing their budget deficits.

There is a certain argument for this. It is the same argument that has got states into off-track horse betting, lotteries and other areas hitherto left to outright criminals. (Next comes public brothels, I guess.) It's not a reform of the financial system, any more than it is gambling reform.

But when the state is being run in criminals, post-Soviet "neoliberal" style, the idea must absolutely be rejected. This is very close to what Iceland already did a few years ago, in effect, by letting its kleptocrats take over the state banks there. They made loans to themselves and their cronies, moved their money offshore, and stuck the entire nation with inevitable losses, Iceland-style or AIG-style.

The private sector has always criticized government on these grounds, and turning a bank over to insiders is probably the quickest way to discredit public enterprise and thereby provide yet a further argument in favor of neoliberal privatizer crooks, Chicago- and Pinochet-style.

The underlying problem today is WHAT credit is being created for. It is created to inflate asset prices (seventy percent of bank loans in the US and Britain are mortgage loans), corporate takeover loans to raiders, mergers and acquirers, derivative credit (a few quadrillion of claims such as drove AIG and others sufficiently bankrupt to enable them to extract $13 trillion from the US Government).

The solution is not to get the government into this business, but to get the private banks OUT of the business they've been in: junk lending.

This is the policy impulse behind Stephen Zarlenga's 100% reserve plan linked to an ultimate public-sector supply of credit to commercial banks run like savings banks or other financial intermediaries rather than abusing their special credit-creating monopoly privilege as at present.

I know Geoffrey rejects this. But what then is an alternative way to prevent junk credit and lending Icelandic-style to insiders as at present, or inflating mortgage bubbles to unpayable dimensions Latvia style? What set of rules might be suggested short of stopping the excess credit?

The classical economists defined productive credit as credit that provided the borrower with the means of repaying the loan with interest. Today's banks interpret that as providing mortgage borrowers and raiders with enough credit to inflate the prices of underlying real estate and corporate stocks pledged as collateral, so as to pay the loan and its interest out of "capital" gains. This was "wealth creation" Alan Greenspan style. It lasted less than a decade, and left an enormous mass of debt pollution to be cleaned up.

It looks to me like the appeal of states creating their own local state banks here in the United States is the hope to create credit as an alternative to taxing real estate or other wealth. In this sense even the commercial bankers may be willing to accept a "public sector option"­ as long as they feel it will soon founder on the rocks of corruption, Iceland-style and thus dissuade future generations from trying to get governments involved in banking in a more positive way.